Agilent’s Shares Seen Revived With Breakup: Real M&A
Agilent Technologies Inc. (A), with a valuation cheaper than 96 percent of peers, would enrich shareholders by breaking up and focusing on its faster-growing biological- and chemical-testing businesses.
Agilent’s stock has risen only 3.3 percent in the past year, lagging behind the 30 percent surge by health-care companies in the Standard & Poor’s 500 Index and leaving its price-earnings ratio lower than all but one competitor, according to data compiled by Bloomberg. Longbow Research says that’s due to Agilent’s electronics-testing unit, which has seen no sales growth in the past decade versus an almost threefold rise at the life sciences and chemicals business, the data show.
Jettisoning the electronics division could boost Santa Clara, California-based Agilent’s value to $52 a share, 19 percent more than yesterday’s close, according to International Strategy & Investment Group LLC. Credit Suisse Group AG said some investors may prefer a company focused on health care. Agilent recently considered expanding that business through a purchase of Life (LIFE) Technologies Corp.’s sequencing unit, according to a person familiar with the matter.
“You look at Agilent and you see them investing heavily in the life sciences area as well as the genomics area, and you think that naturally a split would be a possibility,” Jeffrey Loo, an equity analyst at S&P, said in a telephone interview. “If they do split off life sciences, I think the life sciences division would get a higher multiple and, from that perspective, unlock shareholder value.”
Michele Drake, a spokeswoman for Agilent, didn’t respond to phone or e-mail messages seeking comment on whether the company would be open to a breakup.
Agilent was formed in 1999 when Hewlett-Packard Co. spun off its testing and measurement businesses. The unit that sells measurement products used to build and test electronics equipment saw sales slip to $3.315 billion in fiscal 2012 from $3.318 billion a decade earlier. At the same time, the bio- analytical segment increased revenue to $3.14 billion from $1.13 billion in 2002.
The company’s shares closed at $43.86 yesterday, down from a recent peak of $52.58 in 2011, giving it a price-earnings ratio of 15.3. That’s lower than 25 of the other 26 companies trading for more than $1 billion in the life-science equipment industry for which price-earnings ratios are available, according to data compiled by Bloomberg.
Today, Agilent shares rose 2 percent to $44.75, the highest closing price in two months. It was the third-biggest gain among 53 health-care stocks in the S&P 500.
Agilent’s stock has been pressured as investors grapple with valuing the company’s disparate businesses, according to Mark Douglass, an Independence, Ohio-based analyst at Longbow.
The electronics-measurement business can be off-putting for shareholders because its sales are volatile, he said. Annual revenue at the unit has fallen in six of the past 10 years, while yearly sales from the bio-analytical division -- which includes both life-sciences tools and chemical analysis -- have fallen only twice, data compiled by Bloomberg show.
“They’ve really done a great job of building that business,” Douglass said of the health-care-oriented division during a phone interview. “Investors who invest in Agilent because of that business would rather not have electronic measurement. I think they see it as a drag.”
Agilent itself has signaled it wants to become “more and more of a life sciences company” through acquisitions such as its $2.2 billion purchase of cancer-diagnostic toolmaker Dako, said Vamil Divan, a New York-based analyst at Credit Suisse.
Agilent expressed interest in buying Life’s next-generation sequencing business, a person familiar with the matter said this week. Agilent didn’t make an offer for the unit, although it remains interested should Life opt not to sell the whole company, said the person, who asked not to be identified as the process is private.
Separating the life sciences divisions from the rest of the company could attract shareholders who want to invest in a stock that’s focused on health care, according to Divan.
“It does make it a little bit easier for investors to focus on what they know and not have to worry about things they don’t,” Divan said in a phone interview. “If they took away the electronics side, the entire company probably would receive a higher multiple.”
Splitting Agilent into two businesses -- with one consisting of the electronic testing division and the other of life sciences, chemical analysis and genomics -- would yield $52 a share in value, based on a sum-of-the-parts analysis, ISI’s Ross Muken in a phone interview.
“The total asset trades at a discount,” the New York- based analyst said. A breakup “would be very value-enhancing, and we would sort of implore management to consider it.”
Still, Agilent executives may not want to sever the divisions given the savings from integrating research and order fulfillment, said Joshua Schachter, a money manager at Sewickley, Pennsylvania-based Snow Capital Management LP.
The units are “very different, but it doesn’t mean they can’t go underneath the same umbrella,” said Schachter, whose firm oversees $3 billion, including Agilent shares. “There are benefits to scale and diversification that I think Agilent is enjoying.”
A rebound in the electronics-measurement business could also narrow the gap between Agilent’s share price and the value of its assets, reducing the benefits of a breakup, said Jonathan Groberg, a New York-based analyst at Macquarie Group Ltd.
“I don’t know if it matters to go through all of the effort of splitting up the business if that valuation discount is just going to disappear once the electronics-measurement business turns around, which is historically what has happened,” he said in phone interview. He values Agilent at $47 a share, a 7.2 percent premium following yesterday’s 3.8 percent surge in the stock, based on the sum of its parts.
Still, even if there is a rebound, investors may prefer a simplified company without the risk of another slump at the electronics division, said Douglass of Longbow.
“Investors have a tough time seeing why the two together make enough sense for Agilent to keep them,” he said. “With uncertainty comes lower valuations.”
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